Updated: What Fraction Of America’s $4+/Gallon Gasoline Is Due To The War In Iraq?

Just how much of the pump price of gasoline is attributable to the war in Iraq? A dollar? Three dollars? None. That conversation recently swirled around me and, one one point, someone commented that well over half (or more than $2) of America’s $4.10 gallon of gas is due to the war. Another person asked “Is that right?” And, after pulling out some hair from my head, my response was both short and then long.

The short:

Two dollars a gallon is, perhaps, as good a swag as anyone’s. … I think.

And, the long after the fold.

This is really a tough analytical (ANALyst) question, without a pure answer. How much did invading Iraq add to the price of gasoline? It really depends on who the hell you ask, what assumptions are, etc ..

1. For most, the two prime drivers are mounting demand combined with constrained supply (Peak Oil hits … and the news is NOT GOOD re Peak Oil).

2. There is the seriously debated role of speculation. I have tended to see this as exaggerating the reality, that the situation is is profiting off oil prices not driving them, but people are providing me information/data that at least makes question my viewpoint.

3. There is, however, a major risk factor in the market due to tensions in the Persian Gulf/etc. (The war, threats to Iran, etc …)

4. What about “what if” questions? Without Operation Iraqi Freedom and with better relationships with Iran, would there be global investments in Iraq / Iran such that they would be producing more oil for the world market?

5. To what extent is the Iraq War responsible for the devaluation of the dollar over the past five years and the role this has had on oil price increases?

6. And, this question doesn’t deal with the most interesting question: What is the true total cost of a gallon of gasoline? Because, when we add in security, infrastructure, health, pollution, lost and damaged lives (LIVES!! cost in blood) and other costs, some analysts put the “price” of a gallon of gasoline well above $10 (and even $15) per gallon. But ‘the true cost of gasoline’ wasn’t the question and conversation … thus we will leave this aside.

7. To complicate the picture even more, we could ask “what if” questions. What if the United States hadn’t committed so much in resources (people’s lives, people’s time and intellectual/other capacity, money) to the conflict? What might dead, disabled, and wounded Americans, Iraqis, and others have achieved? Would (could?) some portion of that been used to help move the nation (the globe) toward an Energy Smart future? Might we have made steps to Energize America toward a more prosperous, climate friendly society? What were the “opportunity costs” and how do those relate to gas prices at the pump? This is an incredible sensible, but complex, set of questions and issues which we will also leave aside for the moment, even if you can count me intrigued by the ‘what if’ question.

Let’s look around at some of the discussion of the issues related to the Iraq War and gasoline prices.

Crude oil supply and prices – Crude oil prices are determined by worldwide supply and demand. Events in crude oil markets that caused spikes in crude oil prices were a major factor in all but one of the five major run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council’s study “U.S. Petroleum Supply – Inventory Dynamics.” Rapid gasoline price increases occurred in response to crude oil shortages caused by the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. The cost of crude oil has been the main contributor to recent increases in gasoline prices. World crude oil prices reached record levels in 2007 due mainly to high worldwide oil demand relative to supply. Other factors contributing to higher crude oil prices include political events and conflicts in some major oil producing regions, as well as other factors such as the declining value of the U.S. dollar (the currency at which crude oil is traded globally).

Chris at Daily Liberty Research did a nice post on driving factors of oil prices with an interesting collection of articles, including the late June reporting that “OPEC President Chakib Khelil predicted that the price of oil will climb to $170 a barrel before the end of the year, citing the dollar’s decline and political conflicts…” Chris comes to this key conclusion:

[T]he main reasons for high gas prices are the weak dollar/inflation (aka the Federal Reserve), the current wars we are in, and the likelihood of the U.S. starting more wars in the near future.

National Security Network took a look at the issue as well, with a focus on the risk premium. They comment that “some experts estimate” a risk premium of $30 to $40 barrel due to tensions with Iran/etc. That is what my ‘off the top of the head’ figure would have been for risk premium. But, guess what: even the best analysts, when pushed away from reporters, seem call this a guess, a swag or, at best, an “educated” or “informed” estimate. And, of course, the risk premium doesn’t address the question of whether there would be more oil produced absent the US invasion and occupation of Iraq and sanctions against Iran. Nor does it address the question of how much of dollar’s fall is due to conflict in Iraq and tension with Iran.

A version of this discussion first appeared at The Oil Drum. And, as always, the comments (okay, most comments there) were thoughtful and (often extremely) well informed. There were (just a few) comments that Iraq was irrelevant to gas prices. Others who focused on supply / demand, with one suggesting that about $1.50 of price premium is increased demand/tight supply with about $0.75 being Iraq. Some who tried to calculate what the market implications would be if Iraq and Iranian oil had been maximized, suggesting a major impact on gasoline prices. And, others who queried some of the ‘what if scenarios’.

Many focused on the extent to which Iraq and federal borrowing to pay for it has undermined the US dollar and thus contributed to gasoline price increases. One commenter took the approach of simply attributing 100% of US military operations to the cost of Iraqi oil production, placing it far more expensive per barrel produced than any conceived production project in the world. Another asserted that we sacrificed $0.99 gallon gasoline by the invasion, suggesting $3 increase at the pump, due to lost opportunities for significant increases in supply.

A modified version went up at FireDogLake, where the informed comments and education continued. Amid the comments, Hugh very strongly asserted that the price is driven by speculation above all.

Hugh’s 3 Iron Laws of Energy

1. The price of crude oil and the price of gasoline are not directy coupled.

2. The price of gasoline is always manipulated.

3. The price of crude oil in the short term is excessively high and in the long term absurdly low.

Sort of as a corollary of 3. The major driver in the price of crude since 2004 has been excessive speculation.

Have to say that that list is terrifyingly impressive. And, item 365 is a strong statement, with data, of Hugh’s assertion that speculative activity is a major driver behind mounting oil prices. Hugh has me thinking. Not convinced, but thinking.

Hmmmm… this is a thorny issue. … the opportunity cost of the Iraq War may justify some of the price at the pump. Exactly how much? I’ll stick with you SWAG.

Back to a swag:

To place a little context, America’s gasoline at the pump, on average across the country, has gone up from $1.42 / gallon in January 2003 to $4.10 now. It has gone up $2.68. While there was already some ‘risk premium’ in place at that time (war drums beating), this suggests some form of upper bound on the discussion — but an upper bound that is well above $2 per gallon.

These, however, don’t clearly answer the questions. Is the Iraq war premium $3?$2.30? $2? A buck? Twenty cents? Or, is there no premium at all? I find a $3 per gallon assertion absurd, just as I would find it absurd to assert that there is no premium at all. But, in terms of defensible analysis, in scratching my head, I return to the short answer:

Two dollars a gallon is, perhaps, as good a swag as anyone’s.

…

I think.

But that is why this post is here. To spark a conversation. To be honest, I don’t know the answers to these questions. I wonder whether anyone really does. Which is one of the reasons why I’m writing this. I don’t know. I am not expert on gasoline prices and all the factors that coalesce to drive prices that are paid at the pump. Many here, however, are … Are the questions asked above the right ones? Are there major factors missing? And, what might the answers be? What is a ‘defensible’ statement as to the premium American drivers pay at the pump due to the Iraq War.

Peak Oil

Now, to finish, we must be careful. The Oil Drum published a piece yesterday highlighting that global declines in oil field productivity (core to Peak Oil) seem to be accelerating faster than analysis and reporting had suggested would occur.

The evidence seems to be pointing to an overall increase in the global decline rate for existing wells. What this means is that, if world production is around 86 million barrels a day, then to replace existing declines next year, an additional new production of 4.47 mbd at 5.2% decline, instead of the 3.87 mbd required at 4.5% decline, will be needed just to stabilize supply at a fixed level.

If things work well, opening up all of Alaska would add perhaps 900,000 barrels per day to the oil supply in a decade or so. Ignoring growing global demand for oil (Chinese ‘consumers’ wanting cars like America’s soccer moms and McSUV fans), we need to be finding and putting on line new oil the equivalent of 5% of current production year in, year out just to stay even. Ten years from now, that theoretical new US oil production would be less than 1/50th of the requirement to fill in that gap. (I don’t want to be in the should we, shouldn’t we discussion on that but to make it clear, in yet a different way, that those who are advocating “Drill Here! Drill Now! Pay Less!” are, in the politest words possible, deceitful on a level of nearly criminal negligence in terms of America’s and the globe’s future.) While it is an interesting intellectual discussion to battle over how much Iraq is responsible for today’s gasoline prices and a very sad discussion to have about ‘what if’ George the W had been a thoughtful President and the opportunity costs of not using these resources in a wiser fashion, the key challenge is to figure out and execute paths to get the US and the Globe on a planned (rather than forced) glide slope off oil (and off coal, Global Warming …). And, to get on this glide slope NOW.

At the pump and elsewhere, we are suffering the consequences for, as a society and individuals, our energy illiteracy and bad energy choices. The consequences are already dire. They will only get worse … unless we (as individuals, communities, businesses, governments at all levels, nations, global society) get our act together and start acting. WE have a choice …